The cost of insuring against losses
on European financial bonds fell to the lowest level in eight
weeks on optimism stress tests may boost confidence in the
region’s banks.

The Markit iTraxx Financial Index of credit-default swaps
on the senior debt of 25 banks and insurers dropped 9 basis
points to 131, the lowest since May 12, according to JPMorgan
Chase & Co.

The tests may reveal bank holdings of sovereign debt which
have been weighing on investor confidence since the budget
deficit crisis triggered a sell-off in southern European
government securities. The Committee of European Banking
Supervisors is examining 91 lenders to assess how they can
withstand a shrinking economy and a drop in government bonds.

“Transparency around bank exposures could contribute to
the reduction in volatility,” Aziz Sunderji, a London-based
credit strategist at Barclays Capital, wrote in a note to
investors. Clarity of banks’ holdings is required for issuers
“to feel more comfortable about coming to the market, and for
portfolio managers to feel more comfortable putting large cash
balances to work,” he wrote.

The Markit iTraxx Europe Index of 125 companies with
investment-grade ratings fell 4.5 basis points to 113.75. The
gap between the corporate and financial gauges is now the
tightest since April and down from a record 55 basis points on
June 4.

A basis point on a credit-default swap contract protecting
10 million euros ($12.6 million) of debt from default for five
years is equivalent to 1,000 euros a year.

Credit-default swaps pay the buyer face value in exchange
for the underlying securities or the cash equivalent should a
borrower fail to adhere to its debt agreements. An increase
signals deterioration in perceptions of credit quality.